Analysts predict an US recession, TCS, Infosys, HCL may get affected

With the possibility of recession in the US economy gaining ground with brokerage houses expecting it to hit in the next one year, analysts are of the opinion that it will affect the IT spending of the US as well as Europe. Also, it will hit the Information Technology (IT) companies in India, including TCS, HCL Tech and Infosys as the Indian IT firms depend on the US market for around 40% of their revenues.

On the possibility of a recession, the US-based brokerage firm Goldman Sachs has mentioned in its report that it observes 30% probability of the US entering a recession in the next year and a 25% conditional probability in the second year if one is avoided in the first. Bank of America Securities also sees a roughly 40% chance of a US recession next year, with inflation remaining persistently high.

Alok Bansal, MD and global head (BFSI business) of Visionet Systems India, said, “In March this year, India saw the highest inflation rates since October 2020 with a 6.95 per cent spike. We cannot also overlook the possibility of mild repercussions from the US recession affecting us."

He also stated that the contribution of the US market in the revenues earned by Indian IT companies is around 40.

He states that the Indian IT companies earn around 40% in revenue from the US market. A big part of the revenue also comes from the UK, Germany and France. “In the event of a recession, we will see a further decrease in our IT spending rate. We have already seen how the global crisis in 2008 impacted IT and the BFSI industries and we need to be on our toes as there will be a dip in technological expenditure if the economy slows down further."

In the June 2022 quarter, India’s largest IT services company Tata Consultancy Services (TCS) has reported a consolidated net profit of Rs 9,478 crore for the June 2022 quarter, a jump of 5.2% on a year-on-year basis. The company’s revenue during April-June 2022 rose 16.2% to Rs 52,758 crore, compared with Rs 45,411 crore in the year-ago period.

IT major HCL Technologies’ net profit jumped 2.4% year-on-year in its net profit to Rs 3,283 crore in the June 2022 quarter. Wipro reported its June quarter profit at Rs 2,563 crore, a dip of 20.9% year-on-year. Wipro’s revenue for the quarter rose 17.9% YoY to Rs 21,528.6 crore. Its operating margin in the IT services segment decreased by 200 bps QoQ to 15%.

Sumit Pokharna, Vice President (fundamental research) of Kotak Securities, said, “Currently, most of the Indian IT companies’ management are optimistic on global IT services demand, despite an uncertain macro environment. In fact, in Q1FY23, they have indicated that the current deal pipeline is strong and in few cases, it is at an all-time high. Indian IT companies’ optimism will be tested, especially in the slowdown phase in the second half of the financial year."

He also mentioned that in developed countries a lot depends on the global central bank’s monetary policy and inflation trajectory. The aggressive quantitative tightening of the US Fed to tame inflation may result in a demand slowdown. Apart from the US, a challenging economic environment in Europe also brings uncertainty to the IT spending by clients.

Vivek Iyer, partner and leader (financial services risk) at Grant Thornton Bharat, said a US slowdown would essentially mean rationalisation and re-priortisation of some capital and operational expenditures. “This shall translate into a reduced growth for the tech industry - margin protection is going to be the key focus area for the sector during the period, given the limited growth on account of the US slowdown."

Kotak’s Pokharna also said, “We do not rule out a possibility of Indian IT companies facing the brunt of slowdown in the client-centric regions. Further, companies having higher exposure to discretionary spending are more prone to the risk of IT spending cuts… Coming to margins, most of the IT companies have continued to face margin pressure in Q1FY23. On a sequential basis, headwinds are in the form of wage revision, increase in travel costs, visa costs and decline in utilisation as companies crank up fresher hiring to meet demand."